The growing prevalence of the Internet has changed the marketplace for global commerce. Both businesses and consumers are trying to leverage the Internet to help minimize the costs of buying and selling goods and services. Electronic commerce on the Internet is making it possible to connect buyers and sellers of raw materials, supplies, finished products, services—anything that can be bought and sold. New marketplaces are forming daily for the sole purpose of buying and selling goods and services, some of which have never been actively traded before. These electronic marketplaces match buyers and sellers so that transactions can take place electronically.
The Internet is a compelling electronic commerce platform for many reasons. Access to the Internet is ubiquitous. Even the simplest networked computer capable of running a browser provides a real-time window to the entire Internet. The transaction process—deciding what to buy/sell, actually buying or selling, and the trade settlement can be done in a very efficient manner using the Internet. Information on the Internet concerning the buying and selling of goods and services can be updated, and is instantaneously available to all interested parties. Buyers and sellers can share important information about each aspect of the transaction decision. As participation in the electronic markets increases, so too do choices and opportunities to consummate commerce transactions in a manner that more efficiently meets the needs of buyers, sellers, and market makers.
The first online markets have used the “catalog” model, which basically makes hardcopy catalogs available to buyers electronically via the Internet. In the catalog model, the prices of goods and services are fixed by the seller and offered statically to the marketplace. These first electronic catalogs have helped buyers obtain information about available products, and order products online.
Offering products online in this static catalog format has been an easy and comfortable way for early electronic market (“e-market”) participants to leverage some of the benefits of Internet commerce. Sellers typically post the price lists, catalogs, and sales brochures already in use. Buyers can peruse information from anywhere and make a purchase at any time.
However, the static prices of catalog markets are a disadvantage. Although a seller can check the marketplace on a periodic basis to ensure that his product's attributes (price, quality, color, tolerances, etc.) are satisfactory for buyers and update accordingly, catalog updates typically occur infrequently.
In addition, most catalog markets are single-source; i.e., they only allow customers to obtain information and products from one seller. Therefore, some electronic catalogs have been updated to include information about competing products. For example, CNET (www.cnet.com) provides information about a variety of hardware sellers and gives a comparative analysis of their prices. With the inclusion of this additional information in the electronic catalog, the information search cost for buyers is therefore reduced even further. By offering competing products, the electronic catalog that offers products from many competitors becomes an “electronic market.” Many of these catalog systems, however, are biased towards the seller offering the electronic catalog or market.
The “auction” model of electronic commerce has been developed as a less-biased electronic market promoting competition in order to reduce transaction costs even further. In addition to providing a less-biased market, the auction model facilitates dynamic “price discovery,” as opposed to the static catalog prices.
When many buyers compete for the right to buy from one seller, a buyer-bidding auction model is created. A buyer-bidding auction model allows the buyers to set the price at which they are willing to buy. The seller decides whether to accept the set price and execute the transaction. These seller-centric markets allow the price to dynamically increase until the auction closes.
Seller-bidding auctions have also been developed. For example, a reverse-auction model has been developed that creates e-markets by allowing the price to dynamically decrease, until the auction closes. This model is conducive to electronic auctions for various goods or services, such as when a seller may be a potential supplier bidding on a supply contract. These types of reverse auctions are typically between one buyer and many sellers. In this buyer-centric type of auction, the buyer usually defines the desired products or services for the sellers to bid upon. An example of successful seller-bidding auctions are those conducted by FreeMarkets Inc., which has built a reverse auction for large business-to-business transactions.
FIG. 1A illustrates the pricing for a catalog model e-market. As shown, unless the seller updates his published price, the price of a product remains constant over time. FIG. 1B illustrates the pricing for a buyer-bidding auction. As shown, the price of a product increases over time with each bid in the buyer-bidding auction model, as one would expect in a seller-centric model. FIG. 1C illustrates a seller-bidding, or reverse auction e-market. As shown, the price of a product goes down over time, as one would expect in a buyer-centric model.
Auction markets have received an enormous amount of interest and are creating significant economic and commercial advantage for buyers, sellers and market makers. For example, eBay (www.ebay.com) has generated several hundred million transactions.
However, there are certain limitations to auction-style e-markets. Typical auction e-markets constrain the Internet as an efficient e-commerce platform.
One limitation of auction model e-markets is lack of symmetry—many buyer-bidding auctions have one seller, and many reverse auctions have one buyer. Buyer-bidding auctions are designed to benefit the seller by obtaining the highest possible price of a product. Likewise, reverse auctions are buyer-centric, and are designed to benefit the buyer by obtaining the lowest possible price.
Another significant limitation is time. Many auction sessions run for only a few hours, or days at most. These auction models therefore provide only a brief window of time for dynamic price discovery to take place. The lack of symmetry and the limited time period of the auction model markets frequently prevent true dynamic price discovery from occurring.
Another major limitation is a lack of liquidity, as each transaction may take several hours or even several days. For example, if a seller posts an item on eBay, he or she can sell it in three or more days, depending on the specified duration of the auction, but no sooner. Thus, auctions are not appropriate for fast sales or purchases, which are essential in many markets. If a buyer needs a fast transaction, he or she may have to use a traditional catalog system.
An exchange-based marketplace allows many buyers and many sellers to simultaneously conduct trading within a single marketplace. Unlike catalog and auction models, an exchange is a multi-buyer, multi-seller marketplace that is not biased towards any party. Also unlike many catalog and auction models, exchanges are not constrained by closing times, but provide for continuous trading. The dynamic pricing achieved by an electronic exchange is illustrated in FIG. 1D. As shown, the price dynamically changes as the supply price continuously tries to match the demand price, resulting in an efficient marketplace. Another important advantage of exchanges is high liquidity. With high liquidity, a buyer or seller can usually complete a transaction in just a few minutes.
Examples of the exchange concept applied to e-markets include the trading of stocks on the New York Stock Exchange (NYSE) and over-the-counter equity securities on the National Association of Securities Dealers Automated Quotations (NASDAQ) system. The domestic stock market is one of the most mature, efficient markets in the world. These and other emerging electronic equity exchange platforms have demonstrated the efficiencies that can be acquired through the use of an electronic exchange marketplace.
To avoid the limitations of electronic catalogs and auctions and improve performance, what is needed is an exchange-based marketplace for goods and services that enables many buyers and many sellers to conduct ongoing, real-time trading within a single site. However, unlike the securities market wherein the information needed for a trade consists only of the stock identifier, number of shares and price per share, most goods and services require a larger number of parameters to be specified before a trade can take place.
The automatic matching of a buyer's “bid” and a seller's “ask” in the equities market is conceptually simple. By searching through all the orders for a particular stock, it is a matter of finding a bid price that matches an ask price, then ensuring that the number of shares is sufficient to meet the needs of both parties. The deal is consummated and automatically executed.
For most goods and services, however, the “dimensionality” of the buy-sell match problem is much larger—and more complex. A stock has three dimensions—symbol, order size, and price. Orders can be matched knowing only these three pieces of information. For most goods and services, however, more than three dimensions are required to identify the product for a potential buyer or seller. For example, if a person wants to buy a car, he or she needs to know the make, model, year, mileage, transmission-type, options, color and so forth. As each additional dimension is added, the complexity of the trading platform increases exponentially. Accordingly, conventional trading platforms are simply not capable of scaling as additional dimensions are needed because the number of tradable objects grows exponentially with the number of added dimensions, leading to impractically large memory requirements for these platforms and long response times for the market participants.
In view of the foregoing, it can be appreciated that a substantial need exists for a method and apparatus to perform multi-dimensional electronic matching and trading.